Question

Consider the following information on a portfolio of three stocks:

State of Economy	Probability of State of Economy	Stock A Rate of Return	Stock B Rate of Return	Stock C Rate of Return
Boom	.12	.03	.33	.49
Normal	.54	.11	.23	.21
Bust	.34	.17	–.22	–.36

Required:
(a)	If your portfolio is invested 38 percent each in A and B and 24 percent in C, what is the portfolio’s expected return, the variance, and the standard deviation? (Do not round intermediate calculations. Round your variance answer to 5 decimal places (e.g., 32.16161) and input your other answers as a percentage rounded to 2 decimal places (e.g., 32.16).)

Expected return	%
Variance
Standard deviation	%

(b)	If the expected T-bill rate is 4.3 percent, what is the expected risk premium on the portfolio? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Expected risk premium

%

Answer 1